We develop a parsimonious panel model for quarterly regional house prices, for which both the cross-section and the time series dimension is large. The model allows for stochastic trends, cointegration, cross-equation correlations and, most importantly, latent-class clustering of regions. Class membership is fully data-driven and based on (i) average growth rates of house prices, (ii) the propagation of shocks to house prices across regions, also known as the ripple effect, and (iii) the relationship of house prices with economic growth and other variables. Applying the model to quarterly data for the Netherlands, we find convincing evidence for the existence of two distinct clusters of regions, with pronounced differences in house price dynamics.

Additional Metadata
Keywords cointegration, cross-section dependence, ripple effect
JEL Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions (jel C21), Models with Panel Data (jel C23), Forecasting and Other Model Applications (jel C53)
Publisher Erasmus School of Economics
Persistent URL hdl.handle.net/1765/11723
Series Econometric Institute Research Papers
Journal Report / Econometric Institute, Erasmus University Rotterdam
Citation
van Dijk, A, Franses, Ph.H.B.F, Paap, R, & van Dijk, D.J.C. (2007). Modeling regional house prices (No. EI 2007-55). Report / Econometric Institute, Erasmus University Rotterdam (pp. 0–34). Erasmus School of Economics. Retrieved from http://hdl.handle.net/1765/11723